1QFY20 plunged into the red after four quarters of profits, with core losses of RM113m compared to core profit of RM188m for 1QCY19 and core profit of RM46m for 4QCY19. The 1QFY20 core losses of RM113m is below our/consensus full year core profit expectation of RM112m/RM160.4m due to weaker-than-expected car sales. As such, we cut FY20E earnings from core profit of RM112m to core losses of RM191m, to reflect the weaker-than-expected car sales. Nevertheless, we maintain FY21E CNP of RM149m on new launches, especially the X50. Downgrade to UP from MP with a lower Sum-of-Parts (SoP) derived-TP of RM1.30 (from RM1.40).

Results’ highlights. 1QFY20 plunged into the red after four quarters of profits, with core losses of RM113m compared to core profit of RM188m for 1QCY19 and core profit of RM46m for 4QCY19. This was mainly due to lower overall sales (-21% YoY, -22% QoQ) impacted by the COVID-19 pandemic and further worsened by the unfavourable forex movement which caused the group to recognise c.RM72m forex losses on translation of payables and borrowings denominated in foreign currencies. Automotive segment sales (-19% YoY, -24% QoQ) were affected by the closure of business during MCO with Proton sales at 21,728 units (+40% YoY, -28% QoQ) and Honda sales at 11,226 units (-49% YoY, -45% QoQ). Services segment registered weaker sales (-24% YoY -20% QoQ) especially from Pos Malaysia as its Mail business monthly revenue increased by RM11m in February 2020 but saw flat growth in March 2020 as the rapid spread of COVID-19 resulted in a sharp decline in commercial mail volume, while Postal segment’s retail and international businesses saw fewer retail transactions recorded in post offices and significantly lower cross-border transhipment tonnage handled in March 2020 as customers remained cautious in trading outside their homes. The revenue from properties sector (-19% YoY, +18% QoQ) was mainly from construction-related projects and impacted by the temporary closure of construction sites due to the imposition of the MCO.

Outlook. We are expecting lower sales in the 2QFY20 as no sales were recorded in April up to 12th May and we expect cautious spending on high value discretionary items for the rest of the year. The group noted that, the full recovery of automotive sales to pre-COVID-19 level is unlikely and will however respond with promotions and new model launches to recover lost ground. Meanwhile, the prospects for its other businesses in defence, aerospace, postal and logistics, banking, services and construction segments remain volatile as these have also been impacted by the uncertainty of a prolonged battle against COVID-19 and it will continue to implement prudent cost optimisation and cashflow management to ensure ability to meet its financial and operational obligations. Proton X70 CBU was rolled out on 12th December 2018, and the CKD version (RM4k-5k cheaper than CBU) was rolled out on 12th February 2020, in between the launching of face-lifted existing models’ variants. For 2HCY20/CY21, Proton will launch the Proton X50 (Geely Binyue).

Cut FY20E earnings from core profit of RM112m to core losses of RM191m, to reflect the weaker-than-expected car sales. Nevertheless, we maintain FY21E CNP of RM149m on new launches, especially the X50.

Downgrade to UP from MP with a lower Sum-of-Parts (SoP) derived TP of RM1.30 (from RM1.40) with corresponding downgrade in TP for Pos Malaysia to RM0.90 (from RM1.07). Our TP implies a PER of 17x. Key risks to our call are: (i) faster-than-expected roll-out of new models under the new Geely-Proton management, and (ii) higher-than-expected associates’ contribution.

Source: Kenanga Research - 26 Jun 2020